How to Maintain Your Own Stock Portfolio

by Tricia Chaves

Reap rewards of good research when managing your own stock portfolio.

For every story of a day trader who strikes it rich, there are countless more whose experiences resemble a losing trip to the casino. While at times it seems like a gamble to invest in the stock market, managing your own portfolio with success is a possibility. First and foremost, research and do your own homework. “Don't just listen to the guru of the day,” warns Mike Scanlin, the CEO of Born to Sell of Los Altos, California, a company that specializes in helping individual investors generate more income from their stock portfolios and exchange-traded funds -- or ETFs, as they are often called.

Balance and Diversify Your Investments

Scanlin warns that staying diversified is essential. “Don't put too much -- more than 20 percent -- into any one idea or sector," Scanlin cautions. "Also, make sure your investments aren't too highly correlated,” he adds. Certified public accountant Ryan S. Himmel, president and CEO of BIDaWIZ Inc. of New York, recommends keeping at least 5 percent of your portfolio in a high-yield savings account or CD. “This depends on your age, assets, income, family size, risk tolerance, time horizon and many other factors, but it is generally recommended to keep at least 5 percent of your assets in a highly liquid account,” he explains.

Maintain a Separate Emergency Fund

It is imperative for investors to differentiate between the cash allocation in their portfolio and their emergency fund, which should be enough cash to pay for six months to a year of living expenses. “When you commingle these funds, it’s more difficult to account for an adequate emergency fund because the cash allocation in your portfolio is likely to change with portfolio re-balancing,” Himmel says.

Collect Cash with Call Options

Scanlin says his team uses the "covered call" strategy, through which you sell call options against stocks you own in order to receive a monthly income. “The key is to pick stable, blue chip, dividend-paying, large market cap companies, and then write call options against them,” he says. In his experience, this strategy has not only lowered portfolio volatility but has increased returns as well.

Calculate Your Investment Allocation

Himmel says the common investment practice to follow is to allocate a percentage equal to 120 minus your age in stocks, with the balance invested in bonds. For example, if you are 50 years old, the textbook practice is to invest 70 percent of your retirement funds in stocks and 30 percent in bonds. If you are married, then your age would be the average of both spouses. “This is just a starting point for electing your investment allocation. There are other factors to consider, such as risks to rising interest rates, inflation, and economic downturns,” he explains.

Consider Tax Repercussions

Many investment gurus recommend various asset allocations based on the investor’s time horizon, age, and wealth, Himmel explains. “Unfortunately, we rarely hear about asset location, which is a shame since the right strategy can save investors on current and future tax liabilities,” he says. For example, assets that are tax-efficient with low tax rates should be held in taxable accounts. Less tax-efficient assets with high tax rates should be held in tax-free or tax deferred accounts.

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About the Author

Tricia Chaves began her writing career after working in advertising and promotions for entertainment publisher "The New Times." In 2005, she earned her real-estate salesperson license from the state of Ohio and certification for leasing and property management from the Northeast Ohio Apartment Association. She was certified as a life and weight-loss coach and master practitioner of neuro-linguistic programming in 2011.